This copy is for your personal non-commercial use only. To order presentation-ready copies of Toronto Star content for distribution to colleagues, clients or customers, or inquire about permissions/licensing, please go to: www.TorontoStarReprints.com

Fix retirement system by expanding CPP, former bank governor says

Former Bank of Canada governor David Dodge lends his support to the idea of expanding the Canada Pension Plan.

By Dana FlavelleBusiness Reporter

Tues., Nov. 27, 2012

Expanding the Canada Pension Plan would help solve many of the problems plaguing Canada’s retirement system, especially the growing crisis in employer-sponsored plans, a former governor of the Bank of Canada says.

David Dodge said he isn’t ruling out pooled registered pension plans, the option favoured by the federal government, as a solution to declining rates of private sector coverage and funding shortfalls.

“Anything is workable,” he told a pension conference in Toronto Tuesday, as long as it’s universal, portable and solves the problem of how pension deficits and surpluses are calculated.

But he also said he agreed with Hugh Mackenzie, an economist with the Canadian Centre for Policy Alternatives, that pooled pension plans are more like “jumped up RRSPS.”

Pooled registered pension plans have been proposed by the federal government as one way to close the gap between declining private sector plans and Canadians future pension needs.

But they would be available to the self-employed and to the many small business employees not covered by workplace plans. And by pooling their savings, members would enjoy greater cost savings and shared risk, advocates say.

Canada’s pension system is in crisis, the conference called The Future of Pension Sustainability in Canada heard.

Only a quarter of Canadians have workplace pension plans, down from a third in 1977, and only 12 per cent have defined benefit plans, the conference sponsored by Ryerson University’s Centre for Labour Management Relations heard.

Canadians’ personal savings rates are low and declining, with some people using their registered retirement savings plans as unemployment insurance programs, the conference also heard.

All pension plans face the same issues. An aging population, low rates of return and rising life expectancy rates are putting a strain on plans that were devised in the 1960s and ‘70s when people worked for the same employer for 30 years and died within 7 years of retirement on average, Mackenzie said.

But the two government run programs, the Old Age Security/Guaranteed Income Supplement and the CPP, are in relatively good shape.

It’s workplace plans, particularly those in the private sector, that are in trouble. Discouraged by tax rules from hanging on to their surpluses in the good years, most now have shortfalls, Dodge noted.

If forced to buy annuities today at current low interest rates, many employer-sponsored plans would be unable to meet their retirement obligations, the conference heard.

That means retirees would get shortchanged.

If current trends continue, 24 million working Canadians between the ages of 25 and 40 will have to accept a lower standard of living in retirement, the conference was told.

One solution is to expand the existing Canada Pension Plan to allow higher rates of contribution and coverage, advocates say.

The CPP has many advantages over other schemes, Dodge said told the gathering of academics, labour and management experts.

“It’s a very good system,” he said, noting it has an independent board and sufficient scale to take suitable investment risks and enjoy the savings that economies of scale bring.

With a bigger base, the CPP could replace up to a third of the average Canadian’s income instead of the current one-quarter, Dodge said.

But Alex Laurin, an economist with the C.D. Howe Institute, cautioned that a “one-size fits all plan” may not work for all Canadians.

For example, many lower income Canadians, earning on average $33,000 a year, would be better off investing in Tax Free Savings Accounts, he said.

More from the Toronto Star & Partners

LOADING

Copyright owned or licensed by Toronto Star Newspapers Limited. All rights reserved. Republication or distribution of this content is expressly prohibited without the prior written consent of Toronto Star Newspapers Limited and/or its licensors. To order copies of Toronto Star articles, please go to: www.TorontoStarReprints.com